Does Shanghai Longcheer Technology (SHSE:603341) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Shanghai Longcheer Technology Co., Ltd. (SHSE:603341) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shanghai Longcheer Technology

How Much Debt Does Shanghai Longcheer Technology Carry?

As you can see below, at the end of March 2024, Shanghai Longcheer Technology had CN¥1.82b of debt, up from CN¥1.14b a year ago. Click the image for more detail. But on the other hand it also has CN¥7.59b in cash, leading to a CN¥5.77b net cash position.

A Look At Shanghai Longcheer Technology's Liabilities

According to the last reported balance sheet, Shanghai Longcheer Technology had liabilities of CN¥17.5b due within 12 months, and liabilities of CN¥1.05b due beyond 12 months. Offsetting these obligations, it had cash of CN¥7.59b as well as receivables valued at CN¥9.50b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.45b.

Of course, Shanghai Longcheer Technology has a market capitalization of CN¥16.6b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Shanghai Longcheer Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Shanghai Longcheer Technology has increased its EBIT by 4.5% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shanghai Longcheer Technology will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shanghai Longcheer Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Shanghai Longcheer Technology actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Shanghai Longcheer Technology has CN¥5.77b in net cash. And it impressed us with free cash flow of CN¥736m, being 156% of its EBIT. So we don't think Shanghai Longcheer Technology's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Shanghai Longcheer Technology that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.